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Ally Told Freddie Mac of Faulty Foreclosures Weeks Ago

Ally Said to Tell Freddie Mac of Faulty Foreclosures
Fannie Mae , the largest government-backed mortgage firm, said it notified lawyers of flaws in GMAC documentation after it was alerted. Photographer: Bradley C. Bower/Bloomberg

Sept. 24 (Bloomberg) -- Ally Financial Inc.’s GMAC Mortgage unit told Freddie Mac that foreclosures by the auto and home lender might have been faulty weeks before halting its own evictions, according to two people briefed on the matter.

Ally informed Freddie Mac on Aug. 25 that affidavits for court proceedings might not be valid, according to a person with direct knowledge of the matter. By Sept. 1, Freddie Mac had notified its network of lawyers and stopped related foreclosures and evictions, said the person, who declined to be identified because the matter hasn’t been formally disclosed. GMAC told agents to halt evictions in 23 states on Sept. 17.

Fannie Mae, the largest government-backed mortgage firm, said it told lawyers of flaws in GMAC documentation after it was alerted. Fannie Mae spokesman Brian Faith declined to say when GMAC contacted the Washington-based company, and Gina Proia, the spokeswoman for Detroit-based Ally, said she couldn’t comment.

“We are obviously dismayed by reports of document problems,” Freddie Mac spokesman Brad German said in an interview. “The practices described in these reports are clearly not in compliance with Freddie Mac guidelines and servicer directives.” German wouldn’t say how many of the McLean, Virginia-based firm’s holdings were affected by the freeze.

Servicers ‘Accountable’

Fannie Mae said in a statement that its servicers must adhere to all legal requirements. “It is their responsibility to put processes in place that ensure they are fulfilling this requirement, and they are accountable for rectifying any issues that may arise.”

In a letter to Fannie Mae Chief Executive Officer Michael J. Williams, House Financial Services Committee Chairman Barney Frank of Massachusetts and two other Democrats on the panel questioned the firm’s selection of lawyers and servicers to manage its loans.

“Fannie Mae seems to specifically delegate its foreclosure avoidance obligations out to lawyers who specialize in kicking people out of their homes,” the lawmakers wrote in the letter dated today. “The legal pressure to foreclose at all costs is leading to a situation where servicers are foreclosing on properties on which they do not even own the note.”

Representatives Alan Grayson and Corrine Brown, both of Florida, joined Frank in signing the letter.

Legal Standing

Ally faces allegations that its GMAC unit evicted homeowners without verifying that borrowers actually defaulted or whether the firm had legal standing to seize the homes. Ally, Freddie Mac and Fannie Mae are majority-owned by the U.S. government, which has been pressing lenders to reduce foreclosures as evictions hit record levels.

Ally notified agents and brokers last week that it had suspended evictions. This week, Ally said it found a “technical” deficiency in its foreclosure process allowing employees to sign documents without a notary present or with information they didn’t personally know was true.

Ally said earlier this week it recently became aware that its process for ensuring foreclosures were done properly had broken down, and that it has since been corrected. The company said that aside from signing the affidavits without knowledge or a notary, the details of the files were “factually accurate.”

Freddie Mac had almost $118 billion worth of non-performing single-family loans at the end of June. The company completed almost 153,600 foreclosures in the first half of this year and had more than 62,000 foreclosed homes in its inventory, according to a Securities and Exchange Commission filing.

Fannie Mae and Freddie Mac own or guarantee more than half of the $11 trillion U.S. home mortgage market. The companies are almost 80 percent owned by the government, which took them over in September 2008 after declining home prices pushed them to the brink of collapse. The U.S. holds a 56.3 percent stake in Ally.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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